Joyce’s flight into the unknown

At first glance, any decision at
Qantas
to fly more of its own metal into Asia and recapture some market share and product momentum would appear to fly in the face of CEO
Alan Joyce
’s commitment to a “capital light" international division.

A net increase in capacity – and that is Qantas’s own services, not the addition of those flown by pending alliance partner Emirates – usually requires investment in new aircraft, extra staff and a big bang marketing push to fill the extra seats on sale. But those close to the plan say the crux of the strategy is to make more out of what Qantas, an airline group more than a lone network carrier, already has. Joyce wants to increase frequencies in Asia, swapping more efficient aircraft for the uneconomic 747 jumbos, while sticking to his pledge to keep capital expenditure below $1.9 billion this year and next.

Can the Qantas chief have his cake and eat it too?

More flights departing Australia and greater connectivity out of the Asian ports they land in will not be a hard sell to customers, many of whom have long since made the switch to Qantas’s Asian rivals such as Cathay Pacific or Singapore Airlines. Both of those airlines offer superior frequencies out of Australia and more extensive networks across the Asia region.

But investors who have been sold on the capital light plan – under which investment in new aircraft at the international division will be curtailed until 2016, when it will hopefully have returned to profit and be meeting its cost of capital – will want more than an improved network. They will want to know what the impact will be on the profitable business units that have been offsetting the international division’s losses in recent years.

If Qantas International takes more aircraft from Qantas Domestic, what does the domestic outfit, the backbone of the entire enterprise, get out of the trade?

Any move to increase utilisation of Qantas’s narrow body domestic fleet will be applauded. Qantas continues to lag
Virgin Australia
in utilisation, a key component of productivity. But Qantas has also made a mantra of touting its wide body supremacy over its smaller domestic rival, and any strategy that sees the old 767s linger in the domestic fleet and more narrow body services enter the mix risks the ire of short haul customers.

Improve the international offering, risk domestic bliss. It’s a juggling act for Joyce, and no one envies his task of making more out of the same basket of ingredients. But one thing that emerges from the developments in the Asia strategy, the planned investment in new product, is that he hasn’t given up on Qantas International just yet.